Almost in a perfect storm

Sars is closing in on wealthy taxpayers with undisclosed offshore assets, as well as multinationals that try to game the system, but the fact remains that the heaviest burden falls on individual taxpayers. How much longer can they stand it?

Finance minister Pravin Gordhan dished up a tough budget. But it still leaves the SA Revenue Service with the daunting task of raking in an additional R121bn in gross tax receipts.

It is a big ask in an economic environment where tax collection remains an uphill battle. Reflecting this are preliminary fiscal 2016/2017 figures released by national treasury, which reveal that tax collections of R1.144 trillion fell R30bn (7%) short of the R1.174 trillion targeted in the budget speech Gordhan delivered in February last year. The shortfall was also higher than the estimate of R23bn contained in the medium-term budget policy statement in October.

It was a repeat of tax receipt shortfalls in the two previous fiscal years. In 2015/2016 tax collections came in R11.6bn (1.1%) short of the R1.081 trillion first budgeted, while in 2014/2015 tax collected fell R14.65bn (1.5%) short of the R979bn targeted.

In fiscal 2017/2018 Gordhan is looking to personal taxes to do the heavy lifting, with receipts targeted to rise by a huge R56bn to R482bn. It places a heavy burden on a very small tax base in which just over 1m individuals earning more than R350,000 annually account for 77% of personal taxes, according to national treasury data for 2015.

Gordhan has taken an almost draconian approach, including hiking the maximum marginal tax rate on individuals and trusts to 45%. Bracket creep relief was also limited to a miserly R2.5bn, a mere 0.5% of total personal tax receipts budgeted for.

Ernie Lai King, head of taxation and AfricaAsia practices at Hogan Lovells SA, is concerned about the tax burden on individuals. “It raises a serious question,” he says. “What is going to happen with tax morality?”

One thing is certain: Sars will more than ever be on the hunt for taxpayers bent on evading tax. It has the resources to do so.

“Automation (eFiling) is allowing Sars to apply far more diligent enforcement,” says Mike Teuchert, national head of taxation services at Mazars. “Sars’s systems are working efficiently and enabling them to do a lot more risk analysis and data mining of tax returns.”

Sars’s revenue collection unit is also on the hunt for tax dodgers. “It is well organised and far more diligent in performing audits,” says Teuchert. “They are able to delve into trends and averages to identify taxpayers who should be audited.”

Unintentional errors made by taxpayers can also land them in trouble. In the case of deductions claimed on a tax return, if Sars requests verification it now sends the request to the taxpayer’s online eFiling profile with no back-up through e-mail or conventional mail. Miss a Sars request and it will disallow the deduction.

“An eFiling profile is hardly something most taxpayers will be monitoring on a regular basis,” says Teuchert.

Sars is also hot on the heels of high net worth individuals (HNWI) with undisclosed offshore assets. Under a short-term amnesty it has given them until August 31 to come clean. “Sars has already received disclosures of R3.8bn in foreign assets, which will yield revenue of about R600m,” Gordhan noted jubilantly in his budget speech.

It is probably only the tip of the iceberg. “I would say there are staggering sums of undisclosed offshore assets,” says Andrew Wellsted, head of tax at Norton Rose Fulbright.

Sars is likely to go in guns blazing. It will be armed with the Automatic Exchange of

Information Treaty, an initiative of the Organisation for Economic Co-operation & Development (OECD) which comes into force in June. It will enable Sars to share information about HNWI foreign assets and bank accounts across tax authorities in over 60 countries.

If a taxpayer was under investigation in one tax jurisdiction, tax authorities in other jurisdictions would have no alternative other than to provide information required, Gordhan said.

Wellsted says: “People with irregular offshore structures are running out of time fast.”

They can expect no help from financial institutions, which are now obliged to keep records and comply with due diligence requirements. The first reporting period for financial institutions ends on Tuesday, with returns due in June.

“Institutions are now potentially on the line if a client is exposed concerning irregular actions,” says Wellsted.

Compared with individual taxpayers, companies have come off lightly in the 2017/2018 budget. Their total contribution to the tax coffers is budgeted to rise by only R5.8bn (6.6%) to R218.69bn.

But on paper at least Sars has another means of extracting far more company tax. The potential source is multinationals that indulge in profit shifting to the most beneficial tax jurisdictions with the resultant loss of tax income (base erosion) by countries where they earn their profits.

At the heart of base erosion and profit shifting (BEPS) is transfer pricing. A complex area, transfer pricing between units of a multinational company in different countries should be done at arm’s-length pricing, as would be the case when trading with another unrelated company. In reality, intracompany transfer pricing is open to a multitude of abuses.

According to the OECD, tax revenue losses globally from BEPS are conservatively estimated at US$100bn-$240bn annually, or anywhere from 4%-10% of global company income tax revenues.

To its credit Sars has been at the forefront of international co-operation on combating BEPS since the formation in July 2013 of the BEPS action plan under the auspices of the OECD. Signatories to the action plan will begin exchanging information next year, which will provide Sars with access to country-by-country information on all large multinationals operating in SA.

Sars is already on the move, requiring documentation from multinationals on any transfer pricing action of over R100m.

But whether Sars has the human resources to combat transfer pricing abuse effectively and garner more tax in the process is unclear.

“Transfer pricing is resource heavy in terms of skilled staff required,” says Wellsted. “You need skilled people to sift through data and to apply it.”

Lai King also has reservations. “Questions are being asked about the availability of skills at Sars. It has lost some top people in the transfer pricing unit to the private sector,” says Lai King.

The loss of Nishana Gosai and Sunita Manik to international law firm Baker & McKenzie in September last year appears to have been particularly damaging.

Gosai was the SA representative on transfer pricing at the OECD and is a current serving member of the UN’s subcommittee on transfer pricing. Manik was the only African member of the OECD’s BEPS Bureau and Committee on Fiscal Affairs and was closely involved in the creation of a new international tax framework.

But even if Sars can nail some big profitshifting cases, snatch some more tax from HNWI taxpayers’ offshore assets and extract more from errant PAYE taxpayers, it is unlikely to provide the real solutions to SA’s tax revenue challenge.

“SA is near the end of the road on what can be done to extract much more by way of tax from the economy,” says economist Mike Schüssler. “SA is already one of the world’s most highly taxed countries when measured in terms of GDP.”

Indeed it is, with Sars revealing that it expects total tax receipts in 2017/2018 to equate to 26.7% of SA’s GDP.

The World Bank ranks SA as the eighthhighest tax-paying nation based on a proportion of GDP. The world average is 14.8% of GDP.

Lai King shares Schüssler’s concern. “There is only so much blood you can get out of a stone. We are almost in a perfect storm.”

Gordhan is hinting at a possible increase in the Vat rate. “If they do that you will know they have reached the bottom of the barrel,” says Lai King.

Ernie Lai King: what is going to happen to tax morality?